Thursday, February 5, 2009

NEW YORK -- Every time the oil market attempts to ignite a rally, an upsurge from the sea of crude stored on waterborne tankers snuffs it out.

The accumulation of oil held in "floating storage" gained speed in December, as available space in traditional onshore storage hubs dwindled due to excess supplies. This floating storage is now among the biggest impediments to oil prices recovering any of the ground lost over the past six months. Companies are quick to sell cargoes at the hint of a turnaround, unleashing a flood of oil onto the market.

More oil is being produced than recession-stricken economies need, and prices have fallen as the extra crude fills storage terminals world-wide. Crude-futures prices are down 72% from the record hit in July. Wednesday, light, sweet crude oil for March delivery settled 46 cents lower, or 1.1%, at $40.32 a barrel on the New York Mercantile Exchange.

The oil sitting at sea adds an extra layer of uncertainty about the supply overhang, which traders said must be whittled down for oil prices to rebound.

Tankers carrying up to two million barrels each aren't counted in official statistics. Ship trackers estimate that as many as 80 million barrels may be on the water, or more than twice the amount kept in the largest commercial storage center in the U.S., in Cushing, Okla.

"There's no database of ships sitting on storage right now. It makes it very, very difficult to speculate" on what is on the water, said one tanker broker.

The flexibility that comes with holding oil on a vessel is important for companies looking to quickly take advantage of a market where oil to be sold next month costs significantly less than a contract to deliver later in the year. The sheer amount of crude floating around prevents any permanent narrowing of that discount.

"You can almost describe it as an accordion effect," said Andy Lebow, senior vice president for energy at brokerage MF Global in New York. "For floating storage to come out you want to see these spreads tighten up. When the oil comes out ... [the spreads] widen."

Members of the Organization of Petroleum Exporting Countries are the only producers capable of and willing to quickly slow the flow of oil. The group has cut output by 3.1 million barrels a day since September, according to a Dow Jones Newswires survey.

OPEC's cuts haven't resulted in lower inventories. U.S. onshore oil stocks rose by 7.1 million barrels in the week ended Jan. 30, one of the largest single-week gains ever, according to the Energy Department.

Several OPEC members have raised the possibility of cutting production quotas again at the group's meeting in March if inventories remain elevated and prices stay depressed.

"OPEC will eventually win the battle, but what floating storage does is it delays the victory," said Michael Wittner, global head of oil research at Société Générale SA.